Monday, April 30, 2012

Tax Season is Over!

I have been enjoying the end of tax season and taking a few breaths.  Off-season does not mean the end of this blog, or even a temporary hiatus.  The posts will slow down, but they will keep coming.  Summer posts will be more detailed and informative.

As a teaser, I am working on two new posts:  One, inspired by a Kiplinger's article will go into detail about how Wash Sale rules do not apply to gains, so some people can use this, plus the current tax rates on Capital Gains, to create a temporary loophole that could allow them to sell and then re-buy the same stock, pay no taxes on the sale, and increase their basis so they NEVER pay tax on that gain.  I want to go into significant detail to help people figure out if this could work for them.  Two:  I am researching an article on the Boomer Deduction's history, legal basis and analysis of what I consider an overly aggressive position, an unaggressive position, and my position - an aggressive, but fully defensible position - as well as some unanswered questions about it...

Keep your eyes out!

Thursday, April 19, 2012

Tim Scott talking taxes


Tim Scott (R-S.C.), the first Republican African-American elected to the U.S. House of Representatives from the former Confederacy since 1901, sent out a release this week in honor of ‘Tax Day.’ “True tax reform is something we must move towards, as our current convoluted and complicated system is hurting American families. A flatter, simpler tax code is absolutely necessary to ensure a prosperous future for our children and grandchildren.”
  • The US now has the highest corporate tax rate in the world – the opposite of competitive. We need tax reform for jobs and for American families
  • 3/5 of Americans think we’re overtaxed
  • Our tax code is so dense, the IRS has almost 100,000 employees. South Carolina only has 2 CITIES bigger than that.
  • Americans spend 8 BILLION hours a year doing their taxes. Simpler tax code = less time wasted.
  • There are more than 1,100 forms and instructional booklets from the IRS to determine one’s tax liability.
  • Americans pay $35 billion out of pocket for assistance in filing their taxes.
  • In the past ten years, there have been 4,428 changes to the tax code. There are only 3,653 days in 10 years.
  • Did u know the instruction booklet for the most-commonly used individual form (1040) is 189 pages long?
  • The US ranks 62nd in the world in terms of how easy it is to actually pay our taxes.
  • A recent Heritage Foundation study shows lowering our corporate tax rate to 25% would create 581,000 jobs a year for the next decade.
  • The average American pays $160/year to prepare tax returns. What could you do with an extra $160?
  • This year, 100% of what the average American earns from January 1 to April 17 will go to pay federal, state, and local taxes.
  • The IRS accounts for nearly 80% of the federal government’s entire paperwork load imposed on citizens.
  • In honor of Tax Day – the IRS said in 2008 the Tax Code is so long its “become challenging” to even know how long it is.
Think about how ridiculous some of these facts are for a few minutes. SHARE this story below to let everyone else know how absurd our tax code is.

Wednesday, April 11, 2012

Tax Filing Deadline

The tax deadline this year is 4/17/2012, not 4/15/2012
If you file an extension, it is an extension of time to file, not to pay!
If you e-file before the deadline, you still do not have to pay until 4/17/2012 (postmarked)
If you cannot pay by 4/17/2012, pay as much as you can by 4/17/2012.
You can apply for a payment plan HERE
Or you can pay with a credit card: 1-800-2PAYTAX (they charge a service fee.)
Some other alternatives if you can't pay are HERE
4/17/2012 is also the deadline to amend a 2008 tax return for a refund

Thursday, April 5, 2012

Foreign Earned Income Exclusion - WARNINGS!

If you like the blog, buy my books: Kirk Taylor, EA Author Page

**I have written an update to this with a link to it at the end of this article - Read it Too!**

The Foreign Earned Income Exclusion is a wonderful tax benefit that is available to Americans working abroad.  Unfortunately, many employers and employees are unwittingly over-stating the benefits and applicability of the rules with devastating consequences.  The over-riding myth is, "You're working overseas - that means you're exempt from taxes on the income!"  Some employers actually use the exclusion as a recruiting tool, touting the tax benefit as an exemption from all taxes.

This is not really true.  When using the exclusion, it is important to understand the limits and qualifications.  You can generally accept a big employer with lots of foreign employees assertion that you will qualify (though you can't hold them accountable if you don't.)  I will assume for this article that you will qualify if you stay with your employer.  I want to focus on the pitfalls that you run into even if you do qualify.  Here they are:

Staying Qualified:  Even if you and your employer set you up for qualification, you still, at a minimum, have to spend 330 out of a 365 day period overseas.  If you fail to do this, even for very good reasons, you will lose the exclusion, and all your income will be taxable.  There is only one real way out of this: being forced to leave due to adverse conditions.  The IRS specifically lists those places, and there are very few!  Don't assume just because some IED's went off near your place of work that you can pack up and go home.  A commenter has pointed out, correctly, that you can also meet the requirements for the exclusion via the Bona Fide residence test, but this one is in may ways even more restrictive - see the comments for more info and a useful link.

Filing Deadlines:  That 365 day period above affects this too.  If your first year ends after 4/15, you won't meet the test by the filing deadline.  You can get an automatic extension to 10/15, but you may need to file form 2350 if your year ends after that.  If you don't you could be subject to interest and penalties.

The Big One - There's a MAX:  The maximum credit is $120,000 (2023 amount), plus some housing expense if you have to pay for housing.  Let's assume housing is not an issue.  If you go overseas on 10/2/2023, you only have 90 days overseas in 2023, so you only get 90/365 x 120,000 or $29,589 of exclusion.  Anything more than that is taxable!  Even with 365 days in the tax year overseas, anything over $120,000 is taxable.

The Tax Rate Can Be Higher:  You figure taxes on any remaining income at the tax rate as if the exclusion was not taken, so whatever income is left after the exclusion is taxed at a higher rate.  Also, if you have another job, or your spouse works, their withholding might be inadequate even if you get the full exclusion.

It Limits Other Credits: No Earned Income Credit or Foreign Tax Credit on the same income.

Other Issues: Taking the Exclusion is an election that can be revoked, but can affect other opportunities later.  They are too complex for this article, but you need expert advice if you plan on working or living abroad for a long time.  You also need to make sure your state honors the exclusion (I did not research this specifically, even though I think all of them do in one form or another.)

Be very careful.  Your employer may ask you to fill out Form 673 (or equivalent) to exempt your income from withholding.  This is what this whole article is trying to protect you from.  If you file that form and you make more money than the exclusion covers, return before meeting the testing period, or have to file a tax return before meeting the test for other reasons (college financial aid, home buying) you could have a HUGE tax bill.  I recently prepared taxes for a man who made $150,000 working overseas.  He received the full exclusion and still had a Federal tax bill of over $20,000!

If you know you will make less than the exclusion, you're confident you will meet the test, you have no other significant income, and you can wait to file until you meet the test, go ahead and go exempt if you want.  Otherwise, let them withhold and get the big refund later.

Update HERE

IRS Pub 54

Good Military Tax Reference

For military members looking for some one stop shopping on tax info, this is a good source.  I cannot say for certain that everything is 100% accurate, but I haven't found anything I seriously disagree with, so check it out:


http://militarytaxmatters.com/index.html

Make sure to check out my posts on Military States and the Boomer Deduction